Question

Which one of the following had the greatest volatility for the period 1926-2012?

large-company stocks

a. U.S. Treasury bills

b. long-term government bonds

c. small-company stocks

d. long-term corporate bonds

For the period 1926-2015, long-term government bonds had an average return that ________ the average return on long-term corporate bonds while having a standard deviation that ________ the standard deviation of the long-term corporate bonds.

a. exceeded; was less than

b. exceeded; equaled

c. exceeded; exceeded

d. was less than; exceeded

e. was less than; was less than

Answer 1

Greatest volatility for the period 1926-2012 was for c) small company stocks.
Not a) U.S treasury bills because they have least volatility and are virtually risk free
Not b) long term government bond because they may be riskier than t bills but are much less risky than small company stocks
Not d) long term corporate bonds because bonds are less risky than equities

For the period 1926-2015, long-term government bonds had an average return that was less than the average return on long-term corporate bonds while having a standard deviation that was less than the standard deviation of the long-term corporate bonds.

Correct answer: e. was less than; was less than

It is so because a government bond will always have lesser return and risk due to the fact that government is backed by money printing power and revenue of the government which is less risky than any corporate firm. Hence return and risk for government bonds will be less than hat of corporate bonds